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10 Contract Management Best Practices to Drive the Most Value for Everyone Involved

contract management best practices

Introduction to Contract Management

Contract management (CM) is the key to cost-effective collaboration at all levels of the enterprise.

Truly efficient contract management focuses on developing and implementing a set of best practices to process, monitor, and enforce compliance with terms and conditions that govern commercial relationships to extract intended business value.

With innovative contract lifecycle management (CLM) software like SirionOne at the heart of these best practices, enterprises can realize better business outcomes across every stage of the contracting lifecycle.

Here are the fundamental best practices that can act as the foundation of a strong contract lifecycle management practice:

1. Create a contract repository 

Traditionally, once contracts are signed, they are stored across IT systems that typically comprise an enterprise tech stack. Such siloed, static repositories are difficult to manage or interrogate for insights. Even the simple task of finding the right contract at the right time requires a tremendous amount of manpower. Besides driving up overhead costs, it could lead to business disruptions, missed deadlines, third-party breaches, and non-compliance with contractual obligations.

By digitizing and migrating your contract portfolio to a centralized, cloud-based contract repository, enterprises can empower users to not only access contracts anytime-anywhere, but also interrogate them on-demand for insights. The central repository acts as a single source of truth, also giving you a bird’s eye view of third-party engagements.

2. Harness contract intelligence

As per a study by the National Contract Management Association (NCMA), 54% of participants struggled to access specific terms and clauses without wasting time sorting through their contract portfolio. Even further, more than half said they were unable to analyze their contracts by vendor, customer, product or service line in order to achieve full negotiation leverage and/or optimize performance from a vendor or customer.

CLM software offers a powerful solution to this, with in-depth contract analytics to transform contract data into actionable insights through AI-powered extraction.

AI-driven contract analytics empowers organizations to effortlessly extract and evaluate embedded contract information such as metadata, clauses, obligations and more at a granular level. This in turn can provide insights into risk and offer intelligence based on retrospective data to gain an edge in future negotiations.

3. Standardize the contract creation process

Contracts are traditionally created in silos by discrete business units without any insights into existing contractual relationships or risk factors. While authoring contracts, it’s common practice to pull up possibly outdated templates, make basic changes to metadata, before signing off. As a result, enterprises are likely to face major risks down the line. The only way to get around this issue is to ensure standardization across the contract creation process.

A contract management solution like SirionOne can simplify this by helping enterprises create and implement a library of templates and standard clauses. Contract managers across legal, procurement, and sales departments can then simply select the right templates and legalese from these libraries to generate new contracts effortlessly. Through this technology-led standardization, businesses can eliminate friction points, speed up new contract negotiation, and resolve disputes in a timely fashion.

4. Establish contract management KPIs

“How to ensure successful contract management?”

Answering this question is critical for realizing intended value from contracts. This is where contract management KPIs play a key role. Defining these KPIs and tracking them with the right CLM tool will help you take the necessary actions to ensure the effectiveness of your contract management program.

Here we look at some of the metrics you should consider:

  • Contract initiation & creation cycle times: It is the time-to-contract and is a measure of the efficiency of your contract creation process.
  • Process compliance: It ensures the standardized, approved contracting process is adhered and is a key part of contract administration.
  • Contract risk: This KPI is necessary to reduce risk exposure from non-compliance to contract terms, policies, statutory guidelines, regulatory requirements, etc.
  • Contract deviations & missing clauses: CLM tools can use AI to automatically detect deviating and missing clauses and terms, helping reduce the risk from maverick contracting.
  • Obligation management: It helps measure performance against contractual obligations to ensure deliverables are fulfilled.
  • Disputes and issues: Track the number of contract claims, issues and disputes by contract and by supplier so you can see trends and resolve recurring issues.

5. Configure contract approval workflows

During the execution phase, drafted contracts must be evaluated and approved by multiple stakeholders, including legal, sales, and finance teams. This is a lengthy process, oftentimes riddled with unnecessary back-and-forth and avoidable errors.

However, by leveraging configurable workflows like those found in SirionOne, businesses can simplify the contract approval process. Simple contracts such as non-disclosure agreements can be auto-approved using conditional triggers. More complex contracts can be cascaded down a highly configurable workflow to streamline and accelerate the approval process.

Through such innovation, ambiguity regarding approver roles and contract amendments can be resolved. With SirionOne, team members can also rely on a digital contracting workspace to communicate changes and maintain a complete audit trail of approvals, changes, and sign-offs.

6. Automate the legal review process

According to Gartner, AI-powered solutions will reduce manual contract review effort by 50% by 2024. Businesses, however, can leverage artificial intelligence today through the implementation of contract lifecycle management software to improve productivity within their legal department, limit the need for manual corrections and expedite the contract review and redlining process.

An additional benefit to automated legal review is better risk management. Using CLM software, businesses can enable AI-led legal review to minimize risk exposure and accelerate negotiations.

This simplifies legal oversight. Through more accurate evaluations of risks against specific criteria, businesses can easily identify areas of concern, such as missing clauses and clause deviations.

7. Enable better collaboration

Collaboration is at the heart of an effective contract management process, as it connects all parts of the enterprise. Collaboration with the counterparty is equally important for relationship management and to ensure the intended business outcomes of the contract are realized.

Enabling this collaboration with traditional contract management approaches is challenging due to the inherent siloed way of working of enterprise teams. This leads to confusion, disputes, and sub-optimal results.

Next-gen CLM platforms like SirionOne can help you break functional silos and bring all stakeholders together on a single platform. During negotiation and legal review, advanced workflows and collaboration capabilities, including Microsoft Word and Outlook integrations enable collaborative redlining and negotiations.

After signature, SirionOne offers a shared view of performance data and the overall engagement to you and the counterparty, allowing both to come together for governance meetings and raise issues, take actions, and resolve disputes collaboratively.

8. Holistic & integrated risk management

In today’s uncertain and disruptive business environment, a holistic risk management approach is needed that goes beyond the traditional scope to address all sources of enterprise risk in commercial engagements.

Next-gen contract management software like SirionOne offer just that – helping enterprises mitigate different kinds of risk:

  • Third-party contractual risk: Use AI to find missing clauses and clause deviations in contracts to reduce exposure​ from non-compliant contracting; also ensure regulatory compliance
  • Performance risk: Proactively identify and address gaps in contract performance to reduce disputes and strengthen counterparty relationships
  • External risk: Preempt influence of external market forces on contractual relationships with insights from real-time, real-world data like PESTLE analysis
  • Alignment risk: Mitigate alignment risk by ensuring conformance to organizational objectives and other contracts
  • Perception risk: Gain an accurate picture of supplier performance by bridging the gap between perception vs. actual performance​

9. Optimize vendor and supplier management

Effective vendor management is key to nurturing long-term relationships with suppliers and customers. Not only does this help achieve business goals, but also reduces the risk of supply chain disruption/error on the buy-side, and revenue disruption on the sell-side.

Contract management is a critical tool to align your commercial relationships and their outcomes to the underlying contract. CLM platforms like SirionOne offer supplier management functionality that enables you to monitor and track ongoing supplier performance. This will help you ensure intended business outcomes are achieved.

With both parties accessing the same performance data on a single platform, disputes, issues, and claims can be resolved with transparency, leading to all round-better collaboration and relationships. Further, SirionOne’s invoice auditing functionality can help you identify invoice discrepancies to reduce value leakage, which can be up to 12% of the contract value.

10. Conduct regular performance and compliance audits

Setting up best-in-class contract management processes will not have the desired impact unless you ensure compliance. During the contract creation phase, contract managers need to ensure compliance to the approved process, templates, clauses, approval hierarchy. After signature, you need to ensure the delivered performance is as per the obligations and service levels agreed in the contract.

Conducting contract compliance reviews and audits is an effective way to achieve this. Audits can range from supplier audits, risk audits and regulatory audits. Doing these manually is inefficient, time-consuming and error-prone. Given the critical nature of these audits and performance reviews, technology should be leveraged.

Contract management systems can simplify the process. SirionOne’s obligation management functionality allows you to align performance to what’s promised in the contract by measuring compliance to contractual obligations and service levels till fulfillment. This reduces business risk due to non-performance. Advanced reporting and dashboards can also ensure quick audit response and improve regulatory compliance.

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